Tax & Accounting News

The 3rd Leg of the Sales Tax Stool

Indirect Tax, Sales Tax Calculation June 17, 2009

Written by guest writer: Prashanth Ponnachath, Technical Alliance Manager with Sabrix 

One of the key factors in determining accurate sales tax is to identify the taxing jurisdiction. The United states has more than 13,000 taxing jurisdictions.  When sales tax for a product needs to be applied, the taxing jurisdictions need to be identified. Once the jurisdictions are identified, the rates need to be identified.  The zip code is a common mechanism used to identify this. . The ZIP code is the system of postal codes used by the United States Postal Service (USPS). The letters ZIP, an acronym for Zone Improvement Plan, are properly written in capital letters and were chosen to suggest that the mail travels more efficiently, and therefore more quickly, when senders use the code. The basic format consists of five numerical digits. However, using just the zip code exposes the vendor to audit since the zip is unable to identify and pin point the taxing jurisdictions because many taxing jurisdictions may exist within a zip code thereby causing incorrect taxes to be calculated. 


Another method used to find out the taxing jurisdictions is a process called geocoding. Geocoding is the process of finding associated geographic coordinates (often expressed as latitude and longitude) from other geographic data, such as street addresses, or zip codes (postal codes).  The use of geocodes does not address the issue of accurately  identifying the taxing jurisdiction since multiple jurisdictions can exist within a geocode just like zip codes.


The most accurate method to pin point a location is the zip+4 . An extended zip+4 code includes the five digits of the ZIP code, a hyphen, and four more digits that determine a more precise location than the ZIP code alone. The zip+4 clearly identifies and pin points the taxing authority. Sabrix MTS uses the zip+4 instead of zipcodes and geocodes. One of the key challenges of using the zip+4 is the fact that most vendors do not have zip+4 value in the billing and shipping addresses of customers. This challenge can be overcome by using the address validation feature provided by Sabrix MTS. When Sabrix MTS receives an address with the street name, city and state, the address validation feature has the ability to automatically add the zip+4 to the address thereby making sure that the taxing authorities are correctly identified.  This ensures that the address leg of the stool is always accurate and spot on.